This Week In Securities Litigation (January 4-10, 2008): Insider Trading and Option Backdating

As SEC and DOJ enforcement officials continue their renewed war on insider trading, two high profile cases were back in court this week. First, Eugene Plotkin, a former Goldman Sachs analyst, appeared in New York for sentencing. Mr. Plotkin previously pled guilty to one count of conspiracy and eight counts of insider trading in what is clearly one of the most unusual insider trading cases (discussed here).

Mr. Plotkin is one of the defendants in the “Merrill Lynch/Business Week” insider trading cases filed by the SEC and the U.S. Attorney’s Office for the Southern District of New York. Those cases focused on what was essentially a roving band searching for insider trading opportunities. In one scheme, they traded on take over information obtained from a Merrill Lynch analyst. In a second, information was obtained about forthcoming issues of Business Week. In another, information about the deliberations of a federal grand jury regarding Bristol Myers was used to illegally trade. The cases began in 2005 when the SEC filed an action based on trading in the options of Reebok International in advance of Reebok’s merger with Adidas. SEC v. Anticevic, 05 Civ. 6991 (S.D.N. Y. Filed August 5, 2005).

This week, the court room portion of the cases ended for Mr. Plotkin. He was sentenced to 57 months in prison, order to pay a $10,000 fine and to forfeit $6.7 million which represented the proceeds from his insider trading schemes.

The SEC’s two year old Placer Dome insider trading case was also back in court, but this time in New Westminster, British Columbia. The case started on November 2, 2005 when the Commission filed a civil injunctive action and obtained a temporary freeze order in the Southern District of New York against Unknown Purchasers of Call Options for the common stock of Placer Dome, Inc. According to the complaint, on October 31 2005, Barrick Gold Corp., a Canadian gold mining company, announced a take over offer for Placer Dome. Following the announcement, the share price of Placer rose 20%. Shortly prior to the announcement, unknown buyers purchased over 10,000 call option contracts for Placer through a U.S. broker-dealer. Following the take over announcement, the holders of the options had an unrealized illegal profit of over $1.9 million.

In court this week, the SEC sought to obtain evidence to support its claims from John Brodie. According to the SEC’s papers, Mr. Brodie is suspected of trading in advance of the take over for Placer and believed to have information about the alleged scheme. While the Commission initially sought documents and testimony from Mr. Brodie, it has now limited the request to only documents. This case, like a number of the high profile insider trading cases brought in early 2007 (discussed here) was brought within days of the take over announcement, based on little more than the basic trading information. SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of Placer Dome Inc., Civil Action No. 05-CV 9300 (S.D.N.Y. Filed Nov. 2, 2005).

Finally, former Brocade CEO Gregory Reyes was back in court this week trying to overturn his conviction on ten charges of conspiracy, fraud, making false filings and falsifying records based on option backdating (discussed here). In his motion, Mr. Reyes argued he should be given a new trial because the key government witness against him, former Brocade employee Elizabeth Moore, recanted her testimony, claiming that she had been pressured by the government. Ms. Moore, according to counsel for Mr. Reyes, claims she lied on the witness stand, but refuses to testify without immunity from possible perjury charges.

While Ms. Moore’s testimony was repeatedly cited by prosecutors in arguing that Mr. Reyes knew the backdating scheme was wrong and that he tried to cover it up, the court denied the motion. In its ruling, the court noted that there was more than sufficient evidence to support the convictions of Mr. Reyes.

International Enforcement: A Key Trend for Companies to Monitor

An increasing trend in SEC and DOJ securities enforcement is international investigations and cases. The international component of these matters adds to the difficulty and complexity for regulators and defense lawyers. In the coming months, the trend toward international enforcement will clearly continue and thus should be carefully monitored by issuers with international operations.

Consider, for example, the announcement by the SEC yesterday of a new international arrangement. In the announcement, the SEC detailed terms for increased cooperation and collaboration with the Securities and Exchange Board of India (“SEBI”). One of the key provisions of this agreement is to improve cooperation and the exchange of information in cross-board securities enforcement matters. The Commission’s Press Release is available here.

This, of course, is not the first international agreement to aid enforcement. In the late 1980’s, the SEC began using information-sharing MOUs to aid enforcement. Those agreements were followed by a multilateral MOU developed by the International Organization of Securities Commissions (of which SEC Chairman Cox will become chairman next year) which now includes more than 40 national regulators. While the focus of the agreements goes beyond policing the capital markets, enforcement remains the key. As SEC Chairman Cox noted recently: “Enforcement will, of course, remain the bread and butter of international securities regulatory cooperation, because the seas of global finance are even more shark-infested than anyone’s relatively placid safe harbors at home. Increasingly, not jut two or three but a half dozen or more countries can be involved in a securities fraud. Many of our international cases start out as messy as a CSI crime scene. But as Gil Grissom might say, ‘It’s our job to know stuff.’ And each of us knows that we can’t get the job done without the other’s help.” Speech by SEC Chairman Cox: Keynote Address to the Columbia Law and Business Schools.

Many of the SEC’s current high profile insider trading cases are international in scope and depend on the cooperation of regulators around the globe. The TXU Option case for example (discussed here) and one of its criminal counterparts, U.S. v. Naseem (discussed here) are but two examples of these cases which are international in scope. Many of these cases were brought quickly in part as a result of international cooperation among regulators. The SEC and DOJ may, in the future, depend on similar cooperation to move these cases forward. At the same time, lawyers representing the issuers and persons involved in these matters will face difficult challenges in gathering the necessary evidence to defend their clients.

A similar trend is evident in DOJ cases. Consider for example, the renewed emphasis on FCPA enforcement. DOJ reported that, last year, it entered into thirty four corporate pre-trail agreements to resolve corporate criminal investigations. This is up from twenty the prior year. Eleven of the cases last year involved FPCA charges while only three involved such charges the prior year. See Corporate Deferred, Non Prosecution Agreements Up 70 Percent in 2007, 21 Corporate Crime Reporter 2, January 7, 2008. These numbers reflect, not only an increase in the number of corporate criminal cases resolved with non prosecution agreements, but also a significant increase in criminal FPCA cases. When considered with trends in SEC civil enforcement, it is clear that securities enforcement is increasingly global in nature. This suggests that companies should carefully review their compliance programs not only at home, but abroad.